Exam Practice

Questions (Version B)
Booklet 1 of 3

ETHICS AND GOVERNANCE

Time allowed: 1 hour and 36 minutes

To be used in conjunction with Ethics and Governance, 2nd edition. © Copyright CPA Australia unless otherwise indicated.
Page 2 ETHICS AND GOVERNANCE

CPA Program
Ethics and Governance
Before you begin
This exam practice question resource comprises three booklets:
1. Exam Practice Questions
2. Exam Practice Answers
3. Self-assessment.

To get the most out of this resource, we suggest you treat it like a real exam. That means you should
have worked through the entire Study guide, and utilised all your additional resources in My Online
Learning before attempting these practice questions.

We recommend you complete these questions electronically within this interactive PDF so that you
can simulate reading and answering multiple-choice questions on-screen, and practise typing a
response to an extended-response question. Alternatively, you may choose to print this document
and complete it in a paper-based format.

How to treat this like a real exam:

• Do not be tempted to look ahead to the answers featured in booklets 2 and 3.
• Book the time in your diary so you’re not interrupted—the number of questions included is
equivalent to approximately half a real exam (which is 195 minutes), so allow 96 minutes
to complete it.
• Find a quiet location.
• The exam is open book so have the resources with you that you intend to take into your real
exam. This is your opportunity to practise using them under exam-style pressure to determine
whether you can navigate to the relevant area in your Study guide quickly.
• Set a timer and stick to it.

Upon completion of the exam questions, download booklets 2 and 3 and follow the instructions
provided to assess your responses.

Disclaimer: Your level of success in the exam practice questions is not indicative of your level
of success in the final exam. The best way to achieve success in the final exam is through
regular, structured study and by making use of all the learning resources available to you in
My Online Learning.
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Instructions to candidates
These are open-book exam practice questions. You may use any printed material that you consider
relevant and that may assist you in completing the exam practice questions.

The time allowed for the exam practice questions is 1 hour and 36 minutes. There is no separate
reading time and writing can commence at the start of the time allowed.

The exam practice questions are structured as follows:

• Section A—multiple-choice questions
• Section B—extended-response questions.

The total number of marks for the exam practice questions is 42.

• Questions in Section A (Questions 1–30) are worth one mark each. You should allocate
approximately 60 minutes to this section.

• Questions in Section B (Questions 31–33) are worth a total of 12 marks. You should allocate
approximately 36 minutes to this section.

All characters and events are completely fictitious. Any resemblance to real persons and events
is purely coincidental.
ETHICS AND GOVERNANCE Page 5

Section A—Multiple-choice questions

This section consists of Questions 1–30. It is worth a total of 30 marks.

Allocate approximately 60 minutes to Section A.

Questions 1 to 30 are worth one (1) mark each. Please select only one option for each question.

1. Which one of the following is an attribute that represents the accounting profession under the
market control view?

A service ideal

B the well-being of society

C enlightened self-interest

D membership exclusivity
_________________________________________________________________________________

2. Under the co-regulatory model for the accounting profession in Australia, which one of the
following requirements is set by the accounting profession?

A education requirements

B auditing rules

C accounting rules

D auditing and accounting rules

_________________________________________________________________________________

3. Which one of the following activities represents work performed by an accountant employed in
the private sector?

A forensic accounting services

B evaluating the internal controls of a business

C ensuring a business generates sufficient cash flows

D examination and attestation of financial statements

_________________________________________________________________________________
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4. Which one of the following describes a behaviour that is acceptable in some cultures but that
conflicts with the ethical guidelines established for the accounting profession?

A An accountant reports the inappropriate conduct of another accountant who holds a
higher social status.

B To comply with local legal requirements, an accountant discloses confidential information
about a client.

C To comply with a quality review by a professional body, an accountant discloses

confidential information about a client.

D An accountant ensures the prompt review of documents for a client by offering a
personal payment to a government official.
_________________________________________________________________________________

5. Which one of the following is the best example of creative accounting?

A An auditor’s situation is such that he or she will benefit from a company’s favourable
financial position.

B An auditor uses optional accounting rules to make a company’s financial position
look more favourable.

C An auditor unintentionally omits several items when preparing a financial statement,
which results in the company’s financial position appearing more favourable.

D An auditor uses standard accounting practices in an objective manner, which shows
that a company’s current financial position is more favourable than it was for the
previous year.
_________________________________________________________________________________

6. Which one of the following is a soft skill?

A the ability to use accounting software

B the ability to undertake financial analysis

C the ability to interpret accounting standards

D the ability to comprehend complex information

_________________________________________________________________________________

7. Which one of the following best describes the concept of corporate governance?

A the relationship between principals and agents

B compliance with applicable laws and regulations

C how organisations are directed and controlled

D the efficiency and effectiveness with which organisations are run

_________________________________________________________________________________
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8. Value protection and value creation are key governance roles played by

A accountants.

B board directors.

C shareholders.

D regulators.
_________________________________________________________________________________

9. Dynamic Inc. (Dynamic) is a company that provides services subject to significant government
regulation. Dynamic is currently being investigated for several regulatory violations.

To prevent such violations in the future, which of the following actions is the board required
to take?

A maintain a legal department that has expertise in regulatory matters

B develop internal controls to make the board aware of possible violations

C hold the CEO responsible for ensuring that regulatory violations do not occur

D assign the responsibility for compliance to a team of competent professionals hired for
this purpose
_________________________________________________________________________________

10. Which one of the following describes an outward-looking function of a company’s board
of directors?

A adopting an annual budget and monitoring results

B enacting policies to assure compliance with the law

C determining that the reporting systems and internal controls are adequate

D protecting the company’s financial position and its ability to meet its obligations
_________________________________________________________________________________

11. Ms Jackson is the managing director of Company XYZ. She reviews a preliminary financial report
and then approaches Gerry, the accountant who prepared the report. Ms Jackson requests that
Gerry improve the numbers so that she will get her bonus.

Which one of the following statements best interprets this situation in the context of agency
theory?

A The director is acting in her own best interest.

B The director’s request to improve the numbers demonstrates goal congruence.

C The director has the authority to make this request without considering the stakeholders.

D The director’s interests align with the interests of other stakeholders because the
company will show more profit.
_________________________________________________________________________________
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12. In the context of agency theory, which of the following is the best example of a bonding cost?

A a company’s board of directors

B a company’s yearly financial statements

C a non-compete agreement that all managers must sign

D a generous set of perquisites for directors and managers

_________________________________________________________________________________

13. The board of directors at Under the Sun Manufacturing (USM) develops a vision and strategic
direction for the company that is met with resistance by management. Although USM has reported
record profits for that year, there is concern about whether management is following the vision
and strategic direction set by the board.

With regard to assessing management’s performance during the past year, what is the board’s
most important task?

A analyse the reasons for the record profits and compensate management accordingly

B work with management in establishing the vision and strategic direction for the company

C give management more latitude in deciding the direction of the company because they
understand the marketplace

D request information from management to determine whether they are complying

with the company’s vision and strategic direction
_________________________________________________________________________________

14. Which one of the following factors has been a key driver in the international demand for
improved corporate governance?

A parliamentary address

B financial advisors

C Global Reporting Initiatives

D increasing sophistication of shareholders

_________________________________________________________________________________

15. Market-based systems of corporate governance are most prevalent in

A the United Kingdom.

B Japan.

C China.

D Hong Kong.
_________________________________________________________________________________
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16. Mr and Mrs. Williams have a family owned business that includes two restaurants. Their four
children help them run the business. The restaurants employ a network of extended family
members.

Mr and Mrs. Williams plan to open six more restaurants by using additional equity from
extended family members. They expect the annual gross receipts for all eight restaurants to
exceed $10 million. Mr and Mrs. Williams want to ensure that the business will be managed
effectively and legally if the expansion is successful.

Which one of the following changes to the governance of the business is most important for
Mr and Mrs. Williams to include in their plans for expansion?

A file annual reports

B establish an audit committee

C add independent members to the board of directors

D hire a qualified accountant to prepare financial statements

_________________________________________________________________________________

17. An independent member of the board of directors resigns and a new independent board member
named Georgia Smith is appointed.

According to the UK Financial Reporting Council Governance Code 2014 (FRC Code), which
one of the following conditions should the board consider and explain in establishing the new
member’s independence?

A Georgia represents a minority shareholder.

B Ten years ago, Georgia was an employee of the company.

C Georgia currently participates in the company’s pension scheme.

D Five years ago, Georgia had a material business relationship with the company.
_________________________________________________________________________________

18. A large company is opening a new overseas manufacturing plant for one of their products that is
a major revenue generator.

From a corporate governance perspective, which one of the following describes the most
important operational consideration for the new facility?

A The new facility maintains an adequate supply of labour.

B The new facility can make the component at a lower cost than the existing facility.

C The new facility is closer to the suppliers of raw materials than the existing facility.

D The new facility maintains safe working conditions and offers fair pay to its
employees.
_________________________________________________________________________________
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19. Which one of the following is an auditor’s responsibility when auditing general purpose
financial statements?

A to certify that the financial statements are accurate

B to accept prime responsibility for the financial statements

C to certify that the financial statements comply with a relevant framework

D to certify that an entity’s financial statements guarantee its financial soundness

_________________________________________________________________________________

20. Which one of the following most accurately describes the ideal composition of an audit
committee, based on the auditing standards?

A non-executive and executive directors

B chief executive officer (CEO) and external consultants

C non-executive directors only

D non-executive directors and the chief financial officer (CFO)

_________________________________________________________________________________

21. Who has the primary responsibility for making sure that the information in a company’s audited
financial statements is correct?

A a company’s audit committee

B a company’s board and the auditor

C company management and the board

D company management and the auditor

_________________________________________________________________________________

22. A public corporation aims to reduce its risk of financial failure. Which one of the following will
assist in achieving this aim?

A establish a compliance program

B plan for a series of short-term profits

C use historical data to predict the risk of financial failure

D centralise responsibility for risk management with the chief executive officer (CEO)
_________________________________________________________________________________
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23. A company’s rapid growth has created cashflow issues. The company’s financial controller wants
to delay making required superannuation payments to avoid exceeding the corporation’s debt
limit. The compliance officer has stepped in to ensure the required payments are made.

To ensure the ongoing effectiveness of the compliance program, which of the following actions
should the company take?

A conduct a review of all superannuation payments made in the past

B regularly review compliance policies and procedures to determine whether they are
being followed and are effective

C provide emergency training sessions on company policies and procedures

D have a reward system that compensates the financial controller for complying with
company policies and procedures
_________________________________________________________________________________

24. A retail chain launches a sale on laptop computers in the form of a $300 cashback program.
To receive the payment, however, buyers must return a substantial set of items—including the
original receipt, the product label from the original packaging, a code that the retailer will provide
by telephone, the Universal Product Code (UPC) and others—within seven days of purchase.
Only a small number of buyers qualify to receive payment because most buyers attempting to
receive the payment either returned the set of items after the seven-day window or the set did not
contain all required items.

Which type of consumer protection concept most likely applies to this scenario?

A fraud

B misleading conduct

C market manipulation

D unconscionable conduct
_________________________________________________________________________________

25. Which one of the following is the best example of misleading advertising?

A An advertisement states that a product is superior to another product.

B An advertisement states that a product is the one that the smartest people choose.

C A respected authority is hired by the company to state that a product is the best on
the market.

D An investigation conducted by an independent organisation concludes that a product

performs better in key areas than another product.
_________________________________________________________________________________
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26. A group of friends work together in placing buy or sell orders for shares to artificially inflate the
market turnover. They are engaging in which one of the following offences?

A insider trading

B runs

C cartel operation

D churning
_________________________________________________________________________________

27. Which one of the following is legal but requires approval by the Australian Competition and
Consumer Commission (ACCC) in order to occur?

A entities wishing to engage in resale price maintenance

B entities wishing to fix the price of a particular product

C an entity wishing to acquire another entity that is in a similar industry

D an entity wishing to reduce its prices throughout its stores across Australia
_________________________________________________________________________________

28. Which one of the following is considered an act of insider trading?

A purchasing shares in a company where a family member works

B purchasing shares in a company based on information that is unavailable to the public

C a manager telling a partner at the law firm of his or her company about an upcoming
acquisition

D management and institutional investors holding discussions about investing in the

manager’s company
_________________________________________________________________________________

29. Which one of the following best explains the concept of social and environmental responsibility?

A maximising profits subject to operating within the rules

B ensuring compliance with applicable legal requirements

C meeting the social and environmental needs of the local community

D considering the impact of the organisation’s activities on stakeholders

_________________________________________________________________________________
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30. Which one of the following is a traditional financial accounting convention that limits reporting on
social and environmental outcomes?

A profit maximisation

B revenue recognition convention

C integrated reporting conventions

D reporting period convention

_________________________________________________________________________________
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END OF SECTION A

EXAM PRACTICE QUESTIONS CONTINUE ON THE NEXT PAGE

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Section B—Extended-response questions

This section consists of Questions 31–33. These questions all relate to Case 1. This section is
worth a total of 12 marks.

Ensure that you write your answers in the corresponding space provided for each question.

Allocate approximately 36 minutes to Section B.

Case 1 (12 marks)

Home Smart
Home Smart Pty Ltd (HS) was established in Australia seven years ago. HS is owned by
60 shareholders who each hold 10 shares. HS products smart home devices made of moulded
plastic, which they market through the internet.

A business in a developing country is contracted to manufacture these smart home devices for
HS. Because of the high quality and low cost of manufacture, HS has no need to inspect the
manufacturer’s factory or policies. Prior to signing the contract with the manufacturer, the HS board
viewed the factory site on the internet and were pleased to see that it was situated in a town beside a
pristine river.

Ken Miller CPA has recently been promoted to the role of financial accountant for HS. Ken is married
with a young son and another baby expected soon. Ken manages the finance department and reports
directly to the CEO, Elroy Dani, who was instrumental in Ken gaining his promotion.

In the last year, new competitors have entered the market, causing HS to miss their sales targets
and resulting in reduced profits and cash flow problems. Despite enacting new strategies for
increasing sales and reducing expenses, Elroy has not been able to improve profits and Ken has
projected that cash will run out within a year.

On reviewing Ken’s financial reports for the next board meeting, Elroy directs Ken to change his
projected cash flow report to include more favourable sales figures. Elroy states:

The board already knows about the cash problems, but they are in the past. We should focus on the
future and my new strategies will start to have a positive effect.

A potential investor shows interest in buying a significant number of shares in the company. The board
would accommodate this with the issue of 50 new shares. During the negotiation, the investor added
the following terms to the contract:

Should the company fail to meet at least 90 per cent of its revenue projection within six months
following the investment, the investor has the right to buy out the other shareholders at 50 per cent
of their original purchase prices.

The investor agrees to retain all senior executives and the chief financial accountant in the company
for at least three years.
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Upon analysing the company’s current position, Ken determines that HS is unlikely to meet this
90 per cent goal.

31. Using the case facts, identify two (2) principles of the Compiled APES 110 Code of Ethics for
Professional Accountants (2017) that Ken may breach. Cite the name and number of the principle
and recommend how Ken may avoid the potential breach.
(4 marks)

32. Ken faces an ethical dilemma regarding the negotiations with the potential investor. Apply steps
two (2), three (3) and four (4) of the American Accounting Model to this dilemma. Step one (1) is
provided below.

1. Determine the facts

|| Ken has been asked to overstate the revenue figures in the projected cash flow report.
|| The board is considering selling 50 shares to an investor.
|| If HS does not reach 90 per cent of its revenue targets, the existing shareholders will be
required to sell their shares to the investor for half of their original cost.
(4 marks)

33. Evaluate one (1) environmental sustainability issue and one (1) social sustainability issue that
might arise from HS’s manufacturing arrangements.

Recommend one (1) method that HS could use to overcome each issue.
(4 marks)

Ensure that you write your answers in the corresponding space provided for each question
on the following pages.
ETHICS AND GOVERNANCE Page 17

31. Using the case facts, identify two (2) principles of the Compiled APES 110 Code of Ethics for
Professional Accountants (2017) that Ken may breach. Cite the name and number of the principle
and recommend how Ken may avoid the potential breach.
(4 marks)
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32. Ken faces an ethical dilemma regarding the negotiations with the potential investor. Apply steps
two (2), three (3) and four (4) of the American Accounting Model to this dilemma. Step one (1) is
provided below.

1. Determine the facts

|| Ken has been asked to overstate the revenue figures in the projected cash flow report.
|| The board is considering selling 50 shares to an investor.
|| If HS does not reach 90 per cent of its revenue targets, the existing shareholders will be
required to sell their shares to the investor for half of their original cost.
(4 marks)
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ETHICS AND GOVERNANCE Page 21

33. Evaluate one (1) environmental sustainability issue and one (1) social sustainability issue that
might arise from HS’s manufacturing arrangements.

Recommend one (1) method that HS could use to overcome each issue.
(4 marks)
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END OF THE EXAM PRACTICE QUESTIONS

This is the end of the exam practice questions. Refer to the ‘Exam Practice Answers’
and ‘Self‑assessment’ booklets in My Online Learning to check your responses.